Humana (NYSE: HUM - option chain) stock is declining today after the company said preliminary 2010 Medicare Advantage payment rates could cause reduced profits in 2010. These comments from HUM are dragging down the entire group, including industry stalwart UnitedHealth Group (NYSE: UNH), which is off by upwards of 15%. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on HUM.This morning, HUM opened at $36.70. So far today the stock has hit a low of $30.57 and a high of $36.86. As of 11:55, HUM is trading at $31.41, down $9.13 (-22.5%). Prior to today, the chart for HUM looked bullish, while S&P gives HUM a positive 4 STARS (out of 5) buy ranking.
For a bearish hedged play on this stock, I would consider a May bear-call credit spread above the $45 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in three months as long as HUM is below $45 at May expiration. Humana would have to rise by more than 43% before we would start to lose money. Learn more about this type of trade here.
HUM has shown resistance around $43 recently.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in HUM or UNH.
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Reader Comments (Page 1 of 1)
3-08-2009 @ 7:20PM
David said...
This stock gets to cheap and UNH or WLP will take them out for their free cash flow. At P/E's this low Humana will get taken over.
3-10-2009 @ 1:27PM
David said...
We've bottomed. Also keep an eye on WCG. HUM & even WCG are to cheep and won't stay this way for long!!!